The ugly stick. So, it was that the ISM Non-Manufacturing Index for November would surprise to the upside, and do so convincingly.
Supported by rising production and new orders that at least held their ground, the ISM service sector survey diverged significantly from the S&P Global Services PMI for November. That survey had published their revision to their "flash" release 15 minutes earlier. That survey showed a U.S. service sector already in deep contraction.
The ISM surveys are followed much more closely in the U.S. than are the S&P Global surveys and what you saw on Monday, is what you get. It did not help matters from a financial markets' perspective that within the ISM survey, unlike what we found within its manufacturing survey kin, employment expanded, and pricing remained at an ultra-high level of growth. Nor did it help that October Factory Orders surprised to the upside as well.
So, it was that the "ugly stick" was released from it's lair. Out and about went the stick and everything it touched ended up worse off for the experience. Except the U.S. dollar that is. As the dollar increased in value relative to its reserve currency peers, equities, debt securities and commodities all took one on the chin. The funny thing is, though, and it's not really very funny, that:
...as the dollar responded to the likelihood that monetary policy could remain more aggressive than hoped because of a "growing" service sector,
...and because of a November labor market perceived as stronger than I think it was,
...and as Fed Funds futures priced in a lengthier and potentially higher terminal rate,
...it was the parts of the equity market most reliant upon growing economic activity that were hit the hardest.
Does that make sense? Does it?
If the market beatdown was a reaction to " good being bad," then why would the KBW Bank Index (-4.39%), the Dow Transports (-3.26%), the Russell 2000 (-2.78%), and the S&P Mid-Cap 400 (-2.78%) behave as if the U.S. were going into recession? Does it make sense then, that among the 11 S&P sector-select SPDR ETFs, that Energy ( ( XLE) ), Discretionaries ( ( XLY) ), and Financials ( ( XLF) ) would lead the way lower? With all three surrendering between 2.5% and 3% for the session? Why then would Utilities ( ( XLU) ), Health Care ( ( XLV) ), and Staples ( ( XLP) ), all defensive sectors, take the top-three spots on the daily performance tables? I mean if we are reacting to "hot" economic data?
Was Monday profit-taking as much as, if not more than positioning? Was Monday the result of simple liquidation? Was that it for the October/November/December rally? I mean we did not expect this equity rally to carry very far beyond the new year. Correct? We, well maybe I should just speak for myself.
"I" still see an economic recession in the U.S., likely to be overtly more visible than it is now by late Q1, early Q2. That view is still intact. Let us discuss.
Quicksand
It was a very long time ago, in a distant, unfamiliar land. We were walking patrol. Louis was on point. He was small, and fast. He had reflexes like a cat. An immigrant from Haiti and a very likeable fellow. I was a corporal at the time, and as squad leader, I walked between fire teams two, and three. The jungle was very dense, so I kept my point, my rear, and my flanks within the range of my vision, which I guess made us somewhat vulnerable. That said, this was before GPS, and night vision. If I lost somebody out here, they could stay lost.
Suddenly, as I was watching, Louis disappeared. Vanished. Gone. I mean I had my eyes on him and then he was gone. So was his rifle. So was his gear. Just his patrol cap lay upon the dirt. Quicksand! Holy crap. There are jokes on the internet about having worried about quicksand when we were kids. Well, I have seen quicksand swallow a man and his gear in less than a second. It's not like the movies where they talk to you as they go under. We could now make out the edges of where land and quicksand met, It had been under cover of vegetation when Louis stepped into it.
Dixon up! Dixon, by far our largest private, came lumbering up from fire team three. Sweating and nervous. Dixon, too, was an immigrant from Haiti and he and Louis had hit it off immediately. This was his best bud under the muck. A little background, Dixon had played the offensive line at some small college and had been an undrafted free agent that had been in camp with the New York Jets the summer prior. Once cut from the squad, he enlisted. When I say he was big, he was "offensive line" big.
Down on his knees went Dixon. Into the muck went his massive right arm with myself and my assistant squad leader hanging onto his other arm to prevent him from falling in. Remember, Louis was little. Dixon fished around in the dark, disgusting soupy mix, and then found something. He reached way down, and then with all his might pulled Louis away from his death and still with one hand, raised Louis above his head, while unleashing a blood curdling roar.
Louis was covered with disgustingness. It was in his mouth, and down his throat. It took us a few scary minutes to get him breathing again. When he did, it was with gasps. When he regained his composure, he begged me not to call in a medivac to get him out of the jungle. He wanted to stay. With us. With Dixon, the offensive lineman who saved a human life one long ago day in a long forgotten place.
Lesson Learned
The lesson is that circumstances can change rapidly. Perhaps more quickly than we can. The day you or I need to be rescued from having fallen through a trapdoor, there may not be a jumbo-type human being handy who loves you like a brother, and is willing to put him or herself at risk in order to support you. Agility and the ability to act quickly are the keys to tactical movement in uncertain environments.
Know your options. Know your plan. I have cut some of my longs, as a means of protection, though I think this rally is not quite finished. That's why we adjust price targets and panic points as we proceed. Sort of like knowing where one wants to go, but doing so by making use of "mental" trailing stops. Check that. I use mental stops. Traders who prefer to, can certainly make use of actual stop orders.
What are the pros doing? On Monday, losers beat winners by roughly 6 to 1 at the NYSE and by about 3 to 1 at the Nasdaq. Advancing volume took a meager 7.3% share of composite NYSE-listed trade, but a somewhat healthier 27.1% of composite Nasdaq-listed trade. Aggregate trading volume did increase day over day for NYSE-listed names as well as across the S&P 500. However, aggregate trading volume dropped slightly for Nasdaq-listed names as well as across the Nasdaq Composite. All told, trading volume on "down" days remains far lighter than on up days.
The moderately higher trading volume for a certain slice of our equity market but not across the market as a whole, does reflect at least some professional distribution. This has to be tracked. Should this behavior spread to parts of the market still less impacted or intensify for more cyclical parts of the economy, that would signal a time to decrease long-side exposure as that could mean that portfolio managers are expecting a potentially earlier disruption to the business cycle than previously anticipated.
Charts
As selling was widespread across the spectrum of Treasury securities, the spread between the yields of the U.S. 10-Year Note and the U.S. 3-Month T-Bill eased just a touch.
That said, the spread between the yields of the 10-Year and 2-Year Notes just keeps getting worse and worse and now stands more deeply inverted than it has since before that story I told above ever happened.
The S&P 500 gave up its 200-day simple moving average (SMA) without much of a fight on Monday. That said, the index did not surrender its 21-day exponential moving average (EMA), which could provoke some early buying among swing traders. The index still boasts a better than neutral Relative Strength Index (RSI), but also a daily Moving Average Convergence Divergence (MACD) that looks somewhat vulnerable here as the 12-day EMA came to rest upon the 26-day EMA without visibly crossing below. Note the day over day increase in trading volume.
The Nasdaq Composite stands in a somewhat better technical position than does the S&P 500. Though still mired overall in a descending broadening wedge pattern that is a pattern of reversal, a mini-uptrend also stands untested on either bound. This index has not even approached its 200-day SMA since March, and also looks to its 21-day EMA for potential support that could keep swing traders onsides. Here, the daily MACD does not look
nearly as threatening.
Though off of its recent lows, the VIX has not yet been awoken by traders seeking insurance or protection. The daily MACD is threatening to go positive, but it has done that often without pushing through. Relative strength is weak, as the index still stands well below all three of its key moving averages.
Such a Deal
Interestingly, Microsoft ( MSFT) has confirmed that it is looking to fend off legal objections to its planned $69B acquisition of Activision Blizzard ( ATVI) by offering Sony ( SONY) a 10-year guarantee contract that would make same day releases for the popular "Call of Duty" game series available to its gaming rival.
For those that do not follow the gaming universe all that closely, in terms of console-based gaming, Microsoft's XBox stands in third place behind industry leader Sony PlayStation and Nintendo's ( NTDOY) Switch.
Defense News
-- Blasts at two Russian Air Force bases hundreds of miles inside of the border between the two countries were blamed on Ukrainian unmanned drones. reports are that there were at least eight Russian casualties, as a fuel tanker was destroyed and two Tu-95 bomber aircraft were damaged. The messaging here is huge.
-- Textron ( TXT) announced that its Bell Textron unit had been selected by the U.S. Army to build the Future Long-Range Assault Aircraft. The contract is currently worth $1.3B and could eventually rise to as much as $7B. Textron beat out Lockheed Martin's ( LMT) Sikorsky unit and Boeing ( BA) to land the contract. The Army is looking toward next-generation vertical lift (helicopters) vehicles to replace the Black Hawk utility and Apache attack helicopters, which blows my mind as I grew up popping out of Hueys and watching Cobras do the ground support. Textron needed the deal as revenue driven by the V-22 Osprey is set to more than halve over the next four years.
-- The Pratt & Whitney unit of Raytheon ( RTX) was awarded a $115M contract for the F-135 engine enhancement effort. The upgrade will deliver the fastest, most cost efficient, lowest risk path toward increasing capability for all global F-35 fighter aircraft. The F-35 is a Lockheed product. This program will support 53K jobs across 36 states.
-- This comes on the heels of Raytheon being awarded a firm-fixed-price contract reportedly worth $1.22B for the procurement of National Advanced SAM (Surface to Air Missile) Systems, associated equipment, services, and spare parts in support of the Ukrainian war effort. Completion date is set for November 2025. Contracting agency is the U.S. Army Contracting Command.
-- According to a State Department notice obtained by Bloomberg News, the U.S. is proposing the sale of as many as 100 of the latest, most advanced Patriot air-defense missiles to Taiwan along with radar and associated support equipment for roughly $882M. The Patriot Missile launcher is a Raytheon product. However, the PAC-3 Missile MSE (Missile Segment Enhancement) is a Lockheed product. The PAC-3 MSE has more reach and due to a larger rocket motor, larger fins and thermal batteries, provides improved performance from the original PAC-3. Twelve PAC-3 MSE missiles can be loaded on a Patriot simultaneously, or six PAC-3 MSEs along with eight original PAC-3s if the mission is simply to get more ordinance in the sky.
Economics (All Times Eastern)
08:30 - Balance of Trade (Oct): Last $-73.3B.
08:55 - Redbook (Weekly): Last 10.4% y/y.
16:30 - API Oil Inventories (Weekly): Last -7.85M.
The Fed (All Times Eastern)
Fed Blackout Period.
